Cable's industrial plan must tackle the energy crisis

Misguided energy policies are driving our most important industries overseas,
says David Green.

The real problem with Vince Cable’s speech today is what he did not say. Mr Cable attacked laissez faire but the biggest problem business leaders face is the Coalition’s own policies and omissions. Its misguided energy policies are a government-inflicted wound that can’t be blamed on capitalism. They are driving some of our most important industries overseas leading to catastrophic job losses.

Vince Cable’s speech today is being taken as a signal that industrial policy is back. In fact, the real turning point came in George Osborne’s March Budget speech when he called some of his measures a "modern industrial policy". He even said that we should not be shy about identifying our successful industries and reinforcing them. Mr Osborne mentioned life sciences and aerospace, and promised to establish a UK centre for aerodynamics and to make Britain Europe’s technology centre.

The Coalition’s energy policies have produced a string of unforced errors, with the closure in May of the Lynemouth aluminium smelter only the latest, leading to over 300 lost jobs in the North East, plus an estimated 3,500 more in the supply chain.

Policies intended to combat climate change are undermining the competitiveness of our companies by increasing the cost of electricity relative to our main rivals, threatening the existence of Britain’s energy-intensive sectors, including the steel, glass, paper, chemical and ceramics industries. Together they account for one per cent of Britain’s GDP and employ 225,000 people.

Driven by the zeal of the Liberal Democrats, the foolish unilateral imposition of higher energy costs is a silent killer of enterprise. Fearing higher costs in the future, companies stop investing in Britain. Major closures are reported by the media but decisions to invest overseas instead of in Britain are largely hidden from view. We measure the results later in lost growth and lost jobs. While our economy has stagnated, Germany’s, for example, has been growing. Among the reasons is its protection of energy-intensive companies. They are given significant concessions when paying domestic renewable levies of various kinds. One estimate puts the cost of such reliefs and subsidies at around 9 billion euros in 2011.

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The most harmful Coalition policy is the carbon price floor to be imposed from 2013. Under the EU’s Emissions Trading System carbon emission certificates can be bought and sold, but if the price is considered to be "too low" by the British Government it will impose an additional levy on British companies. The Government has given a concession to some high-energy users, but the policy ignores the hidden effects on small, medium and prospective businesses not covered by the opt out. And because we are the only country enforcing the price floor, as Tim Yeo MP, chairman of the Climate Change Select Committee noted in January 2012: "a Carbon Price Floor could result in industry and electricity production relocating to other EU countries. Unless the price of carbon is increased at an EU-wide level, taking action on our own will have no overall effect on emissions other than to outsource them".

In other words, the policy is self-contradictory. Total world emissions would not be reduced, but rather relocated outside the UK. In the case of the chemicals industry, we may drive overseas an industry that makes products, such as insulating materials, that are essential to energy conservation. This is despite Mr Cable’s declared enthusiasm for science-based industries.

The Coalition’s energy policies are obstructing growth, increasing unemployment and are self-defeating. Many Conservatives are aware of the harm being done and, in his speech to the annual Conservative party conference in October 2011, George Osborne said: "We’re not going to save the planet by putting our country out of business." He went on: "So let’s at the very least resolve that we’re going to cut our carbon emissions no slower but also no faster than our fellow countries in Europe". If the Government’s policies were to be based on this principle, it would be a significant step in the right direction, but it would be better still to restrict all climate-related measures to those that keep the UK among the most competitively priced energy markets in the developed world.

Mr Osborne was right to point out in the March 2012 Budget that "gas is cheap, has much less carbon than coal and will be the largest single source of our electricity in the coming years" He set out plans to ensure that the key advantages of gas can be maximised. However, many current Government policies are pulling in a different direction. Both economic and environmental goals could be satisfied in the short term by relying on zero-carbon nuclear power and comparatively low-carbon gas power as our main fuel sources for the next few years. But in the May 2012 draft energy bill, Energy secretary Ed Davey announced his intention "to make sure the bias towards gas is dealt with ... and that low carbon sources can compete on a level playing field."

With a fifth of power capacity expected to shut down in the next ten years as a result of EU regulation, this is not the time to be worrying about ensuring renewables have a share of the energy mix. Instead, we should be ensuring the UK has the capacity to meet future demand through gas and nuclear power. In particular, public policies have yet to reflect the discovery of shale gas in Lancashire. The discovery of shale gas in America has transformed the market there, leading to a fall of over 50 per cent in the price of natural gas in five years. We should develop our reserves at the fastest possible rate in order to develop gas-powered energy without jeopardising energy independence.

We urgently need a new industrial strategy, but Mr Cable’s speech had nothing to say about energy policy and until the Coalition stops doing more harm than good, declarations of enthusiasm for industrial policy can’t be taken seriously.